Asymmetrical Information

Let's read an expert.

It shouldn't be that hard, should it? I mean, if the pigs can teach the chickens and the sheep of Animal Farm the key slogan, "Four legs good! Two legs bad!",* we economists should be able to teach the press corps of America the slogan, "Countercyclical deficit good! Structural deficit bad!", shouldn't we?

Yes, GT, that's just my point. The empirical evidence I've seen -- and that promulgated by my macro professors, (who I believe were Democrats, and who were, at any rate, speaking before the 2000 election in an era of surplus) -- says that temporary tax cuts do not provide good countercyclical stimulus, that "temporary" spending measures aren't, and that the distribution of tax cuts among the income quintiles does not have a significant impact on their stimulative effect. . . given these things, why are DeLong et al arguing so hard for their pet measures, other than because they reflect other, non-economic priorities such as a belief in the social value of income redistribution and higher government spending?

Maybe they disagree with your premises?

Perhaps they do, GT. If so, I'd like to see the actual evidence that I am incorrect. All of the arguments are disturbingly short on citations. The arguments sound superficially plausible, but since I'm told by respected economists without (at the time I was told it) an obvious axe to grind, that the weight of the evidence leans in the opposite direction from their implicit premises, I want to know where they are getting their assumptions.

Here's why the economic policy isn't Keynsian:

Keynes talks about government spending as a stimulus to an economy in down times. The reason I call the tax cuts "pseudo-Keynesian" stimulus is because they aren't designed to provide government-reinforced economic stimulus. They're designed to encourage the further development of current economic patterns (that's the point of tax cuts, to encourage behavior in the areas where taxes are cut). These tax cuts aren't Keynesian (despite the fact that they provide a budget deficit) because they don't stimulate any sort of investment - for the most part, they stimulate a transition of certain types of income to other types of income (dividends, for example) and other behaviors (such as the repeal of the estate tax) that provide no large or even small-scale economic stimulus, but instead, the aggregation of wealth.

Running a deficit to counter-stimulate the economy (essentially to promote a concentration of wealth rather than a flow of it) isn't what Keynes would have advised, I think.

Thanks to jesse who posted this on Pendragon on 7/18/2003.

Libertarians, on the other hand, should be giving Bush very low marks based on his restriction of civil liberties, quick-trigger militarism, and 'don't tax but still spend' irresponsible fiscal policies.

Ok, fine. I'll give him very low marks based on his restriction of civil liberties and 'don't tax but still spend' irresponsible fiscal policies.

Now who in the hell do I vote for? Keep in mind that the Democrats seem to find his domestic spending inadequate. Also keep in mind that Clinton and Janet Reno were no slouches in the "restricion of civil liberties" department.

hi all,

following on from dark avenger,

"These tax cuts aren't Keynesian (despite the fact that they provide a budget deficit) because they don't stimulate any sort of investment."

spot on. keyenes was VERY CLEAR in the "general theory" as to what he thought the major problem was--volatility in investment. consumption was not the problem--it was remarkably stable in keynes' view.

the problem is not that the tax-cuts are permanant. the problem is that the cuts do not act in an "efficient" keynesian fashion to stimulate investment. that has been the major criticism. the argument made by the majority of the administration's critics has been (as i understand it) that the wealthy "sock their money away" in much the fashion that jane has argued that those who expect the tax cuts to be temporary do (the assumption being a lower marginal propensity to spend--or more sophisticatedly, a higher marginal propensity to import than the average person). ironic, isn't it...

in any case, if investment could not be stimulated, the easiest way to stimulate the economy was not tax cuts, but gov't spending (more bang for each buck). the interesting thing is that this gov't is quite keynesian in that regard--we are spending heaps more than we were 4 years ago! and tax cuts too!whoo-oooh!

what urks me is that we could have gotten better economic performance than we have now, with less of a budget deficit than we have now.

GT,

It is interesting that consider Brad and expert, but you don't consider me to be one. We both have Ph.D's from saltwater institutions. I've actually got more experience in applied macro than he does (although I absolutely respect Brad's knowledge and admire him tremendously).

The difference, I think, is that Brad has become one of those Democrats who is so angry that Bush is President that he cannot see straight. My challenge to Brad is to show me a comparative statics analysis that indicates a substantially lower unemployment rate with Democratic tax cuts than with the tax cuts we actually had. It can't be done.

Political Brad mocks the Bush Administration for forecasting that employment would increase. Then economist Brad points out that Okun's Law, which has been the prime tool for forecasting employment for over 30 years, has broken down.

I'm not trying to change political Brad's mind. But I'd like to see political Brad and economist Brad talk to one another once in a while.

And as an aside, if you want to give Bush a grade as a *supply-sider* then it ought to be really low. I explain on my blog why his "supply-side tax cuts" are an oxymoron.

Arnold,

I did not say I didn't consider you an expert.

I was responding to Jane's point which is somewhat different than yours.

In fact you seem to agree with Brad when you write:

The economists who worry about long-run fiscal policy may be right. I think that the structure of Medicare is a larger source for concern than the Bush tax cuts, but if the former is not changed then the tax cuts may have to be reconsidered in a few years.

That, after all, is the point those like Brad or PK make. That the issue is not TODAY'S deficits but the long term impact. Did you get a chance to see Krugman with Tim Russert over the weekend? It was an hour-long show and PK made very clear what he was concerned about. In fact his points almost echo the paragraph I quoted from you. That, given current fiscal dynamics, we will either have to raise taxes substantially or will have top cut middle class entitlements a great deal.

Jane is saying something different, that temporary fiscal stimulus is useless or not possible.

GT, those aren't opposing points. They simply add up to the idea that I think is correct: that you can't provide significant stimulus without significantly disimproving the long term fiscal picture.

Well, that's where I think Brad and many others would disagree with you. I don't think he or PK or Akerlof (or probably Mankiw if he could say what he thinks) would agree that you can only have short term stimulus by worsening the long term outlook.

Or, to put it another way, that the only way to get the level of ST stimulus we have today is to accept the level of LT deficits we now predict.

I know of nobody that really thinks that if we overturned the estate tax cuts, for example, and went back to where we were in 2000, that that would have any impact on today's employment levels.

The theory that temporary tax cuts have no stimulative impact is backed by no empirical studies I know of. Which do you have in mind?

The idea that all countercyclical spending will necessarily become permanent is not supported by the facts either. Increased unemployment benefits and one-off grants to states that would otherwise have to raise taxes or cut spending both would easily be gone after the economy recovers.

Certainly PK (and I think Brad as well) have long made the point that it is monetary and not fiscal policy the main driver of ST conditions. Fiscal policy can, in their view, only act as a support for monetary policies.

GT: Try this paper: Expanding the Life-Cycle Model: Precautionary Saving and Public Policy
by R. Glenn Hubbard, Jonathan Skinner, and Stephen P. Zeldes
The American Economic Review, Vol. 84, No. 2, (May, 1994), pp. 174-179.

JT,

Hubbard, in testimony before the Joint Economic Committee in January of this year, says that a temporary tax cut has about half the impact of a permanent one (he actually quotes someone else but he agrees with that assesment).

It is quite different to say that a temporary tax cut has less impact than a permanent one (with which I would agree) than to say it has no impact at all (which is what Jane implies).

GT, go reread my post. I didn't say they had no stimulative effect; I said that they were very ineffective, which is not the same thing.

Huh? If I remember my multipliers, the "orthodox Keynesian" thing to do is to increase spending (since all of that is spent), not cut taxes (since only a fraction of that is spent).

"The history of temporary tax cuts seems to show pretty conclusively that if you tell everyone a tax cut is temporary, they sock a lot of it away for the future."

Um, any links?

I think the point remains the same.

You claim that there is no way to get the level of stimulus we have now without, at the same time, accepting the level of LT deficits we face today.

And there does not seem to be much evidence for that.

Temporary tax cuts, while not as effective as permanent ones, do have an impact. Since it's less effective you can always increase it or rely more on spending.

Countercyclical spending can be enacted. In fact, it has. Unemployment benefits were extended but that will lapse. We could have easily given more money to the states. Even the war-related spending is, to a great extent, a temporary stimulus.

In short there is no reason to accept that stimulus today requires the levels of future deficits we now have before us. That is the point PK, and Delong and Akerlof have been making. I repeat, what impact on today’s unemployment would overturning the estate tax cut have?

If you follow the link to Akerlof's remarks and read them it's clear he's worried about the LT impact. He is not talking about the ST stimulus.

I also wonder how much of the tax cut money is going simply to fund the deficit? I mean the “Evil Rich” might not shove the windfall into a mattress but the government is borrowing the dough from someone. They aren’t barrowing it from childless, inheritance-less and dividend-less me who got left in the cold in the latest round of cuts.

And what is the back of an Eskimo pie wrapper calculations on the fact that the borrowing is dwarfing the tax cut? Sounds to me like the tax cut is simply funding the deficit, like a big shell game.

I'm still waiting for the day when Googling "billionaire-economist" yields more than three measly hits.

I find it odd that article talks about Bushes critic saying it (the Tax cuts) should have been more Keynesian, these tax cuts should have been temporary, not permament, but in actuality, they *are* temporaru, as the two tax cuts Bush got, gets phased out in 5 years and again in 7-8 years.

Countercyclical spending, except in a few rare instances, tends not to be temporary, and the markets price that in in exactly the same way that they price in the fact that Bush's tax cuts aren't meant to be temporary -- more so, I'd argue, as taxes have been raised much more regularly than spending has been cut over the last 75 years. And unemployment benefits that stretch beyond a year start introducing long-term supply side problems into the economy, even as they provide some moderate demand-side stimulus, which is why they are undertaken with only great reluctance.

"Countercyclical spending, except in a few rare instances, tends not to be temporary"

Is that why total federal spending spending as a share of GDP (table 8.4) has remained roughly constant for years and years? Its about the same now as it was in 1970 (albeit with a 4.5 point shift between defense and discretionary). The "other" category of discretionary - where you'd expect all this pork to end up - has varied between 3% & 4.2% of GDP, with little relation to the business cycle.

Excuse me, I was looking at the wrong side of the table. There was a 4 point shift from discretionary to mandatory (almost all in military). Total non-defense discretionary in 1970 was 3.8%; in 2002 it was 3.7%.

"Is that why total federal spending spending as a share of GDP (table 8.4) has remained roughly constant for years and years?"

Well, yes, given that GDP itself has been growing for years and years. I don't see any reason why Federal spending should keep up with GDP growth.

"I don't see any reason why Federal spending should keep up with GDP growth."

Because people's marginal preference for government spending isn't zero? Bonus question: why does the Pentagon budget go up every year?

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